Last week was full of news but the obvious in importance was the news out of Espirito Santo bank of Portugal http://www.chicagotribune.com/business/sns-rt-us-espiritosanto-esfg-20140710,0,5483314.story.  This is Portugal’s largest bank and they missed a bond payment, their stock had been halved in the last month prior to being halted for trading.  The ripples from this news spilled over throughout Europe as bond yields of weaker credits increased and several scheduled deals were pulled.

This was THE big news of the week which overshadowed almost everything else but should not have because there was so much other important news.  Just off the top of my head, Austria’s largest bank reported a 40% increase in bad loans, the head of the central bank of France called for a change in the world’s reserve currency and an end to the petrodollar, the BRICS brought forward a bank to compete with the IMF and World bank, Germany kicked out 2 U.S. spies and told German companies to limit business dealings with U.S. counterparties (they also approved “bail ins”), WalMart admitted that it was not the weather that has torpedoed the economy, bank runs hit Bulgaria 2 weeks after the IMF said that their banks were solid.  We also watched as the Israel/Gaza situation heated up with live fire while the borders of the U.S. were thrown wide open.  Lots and lots of news but the sheeple slept on.

Quietly there was another piece of “news” so to speak.  The chief investment officer at Allianz, Maximilian Zimmerer dropped a “truth bomb” on the world…sort of.  Understand that Allianz is the biggest insurance company in Europe so this is not some obscure blogger making the claim that “the fundamental problems are not solved and everybody knows it”.  This is a big statement from the head guy of a very large insurance company that manages $750 billion.  He also said the obvious, “the euro crisis isn’t over”.

I mentioned he told the truth “sort of” because he followed up with “I do not expect a new crisis because the ECB sits there with a printing machine in their hand” and an even bigger hedge “So I can’t see why the market should go back to this kind of crisis mode we saw in 2012”.  What he first said was very true, nothing has been solved.  In fact, nothing has even changed it has only gotten worse.  Debt levels (and ratios) are higher today than 5 years ago, derivatives exposure and entanglements are larger and further spread, and now nearly all sovereign treasuries are exposed.  It “was” a banking problem, it is no longer “just” a banking problem, now nearly every “nation” is involved and wobbling to some extent.

If you go back to his “hedge” where Mr.Zimmerer said it’s not fixed but he doesn’t expect a “new crisis” you can see the flaw.  He fell back on the “but the central bank has a printing press” meme.  First off, this “fix” has not worked.  Has QE worked?  Are we in the U.S. not again in a recession (we are and have been) even after 4 shots of money printing adrenaline?  Did it work for Japan?  But he thinks the ace the hole for Europe is the printing press?  The ONLY benefit of QE (printing) is that of “liquidity”, NOT solvency.  You can print all the money you’d like to which may or may not preclude a panic (for the time being) but it cannot ever make an “insolvent” magically solvent again.  Another way of saying this (as I have since 2007) is that no amount of money printing can make a bad loan or bad loans plural …money good.  Yes, money printing will allow the current payment to be made but it will not “lower the debt” or actually pay it off because the printing process is in actuality creating more debt.  You cannot pay one debt off by incurring another, larger debt.  You can pay one credit card off with another one but you still have the balance, it won’t go away no matter how much you print.

I do think that this is interesting looking at it from both sides though because Mr. Zimmerman really did stray off the ranch by telling the truth.  I really wish I could have seen the interview in person because I suspect that the words may have just come out.  Just like a gun that is fired, once triggered, the bullet isn’t ever coming back.  This is what I have said on several occasions, “everybody knows that everybody knows about the crazy aunt in the basement but no one is willing to talk about it”.

I do also find the timing of this, (let’s call it a “slip”) to be curious because of what else is currently happening.  It is clear that the global economy is slowing very rapidly AND that credit conditions are tightening and contracting.  You can see this with the various bank announcements, you can see it in China where their shadow banking system is beginning to grind because of missing collateral.  You can also see this in the U.S. in the repo market where the “fails” to deliver has just recently spiked up again to dangerously high levels.

In my opinion we are very close to something in the credit markets snapping.  We will either see QE out of Europe (and the thinking is also out of China) to prevent defaults or, the defaults begin and lead to a holiday/reset scenario.  I do not believe that the Chinese really want to play the game, nor do I believe that their appetite for gold can be satisfied much longer so my bet would be that very shortly the much spoken and written about reset will be at hand.

It is unfortunate that we will be forced to live through this but it truly is fascinating history to watch with your own eyes.

Regards,  Bill Holter